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This is a story about how Bank of America violated the bankruptcy discharge, hacking off Gus and Nikoleta, and me.  (I’ve changed the names of Gus and Nikoleta–all the rest of this is true.)  And then hit Gus and Nikki for a “foreclosure fee” while they were current.  And then did it again.
Gus and Nikoleta came to see me in 2009.
Gus and Nikki had been through tough times and they were behind on the mortgages.  They had a first and a second, both with Bank of America.  They were fifteen thousand behind on their first mortgage and Bank of American was about to foreclose.
We put them into a chapter 13 bankruptcy.  The had five years to pay the bankruptcy court fifty thousand dollars–catching up the first mortgage, knocking the second off the house, and paying off their car, and a little something to the rest of their creditors.   (I explain how that works, here.)
In early 2011, Gus lost his job–he used his thirty five thousand dollars severance to pay off the chapter 13 early!  (Pretty gutsy–he was hopeful he could get work again soon.)
After the Chapter 13 bankruptcy was paid and closed in May 2011,  Bank of America misbehaved.   Calling Gus and Nikki day and night, trying to collect that second mortgage that had been knocked off by the Chapter 13.
Gus tried to handle this on his own.  He called Bank of America–and over five months talked to Denise, Eddie, Shauna and Tanisha.  Each of them claimed in different ways that he still owed the second mortgage.  He faxed them five times and sent certified mail.  They kept leaving voice mails and kept billing him.
And in July 2011,  they also put a $450 “foreclosure” fee on his first mortgage, which was, of course, current.
Finally, in April 2012, I filed papers to bring the bank in front of the bankruptcy judge.  (I was way slower than I should have been.)  That started months of back and forth between me and the Bank of America lawyer.  We agreed quickly that they owed Gus and Nikki some money for their aggravation.  And they owed legal  fees, because the bank refused to shape up until I got involved.
We agreed, after several months, what the bank owed us–but then they said they wouldn’t pay unless I promised I wouldn’t do a blog on this whole mess.
Well, I hadn’t blogged on it–my blog is mostly helpful advice, not courtroom drama.  But it’s a legal ethics violation for a lawyer to promise to keep information from the public.  (That sells out the rights of people who might be in the same boat.)
Finally, the bank agreed to drop that demand, and we signed a settlement.
As soon as the settlement was signed, a new $450 foreclosure fee hit Gus’s monthly bill!  The bill said he owed $450 for foreclosure fees for January 9, 2013, when he was current!

They did it again. Bank of America charged a foreclosure fee when Gus and Nikki were current--then they did it again!

What?  Having spent months fighting Bank of America on his own, this time Gus called his lawyer, me, right away.  He told me to get on it!
I called up their lawyer the next day and asked what the heck was going on.  He assured me the Bank had a right to the $450 and he’d let me know what right as soon as he found out.
Then he called back and said, complain all you want to the bankruptcy court, it will do no good.   Since the bankruptcy is over, the bankruptcy court has nothing to say.
Well, I did complain to the bankruptcy court–I’d been reasonable, now they were pushing us around.
In court last month, their lawyer said this was the same $450 foreclosure fee we had complained about the year before.  We had no business, he said, complaining a second time.
When the Judge asked a follow up question, the lawyer gave a different excuse.  We agree this is a mistake, the lawyer said, it’s in our computer, we can’t figure out how to stop it.
That was four different “excuses” in the space of four weeks.
Excuse one:  It’s right–Gus and Nikki owe the $450
Excuse two:  It’s not part of the bankruptcy; you can’t complain to the bankruptcy judge
Excuse three:  This is the same $450 you complained about before; it’s unfair to complain again
Excuse four:  It’s a mistake; we’re trying to fix it
The bankruptcy judge told the lawyer to come for trial on May 23 with a witness from the bank who knows and can explain what is going on.  Or, you can settle with Mr. Weed and his client.    (I thought that was a hint that the bank should settle, but so far they haven’t.)
It will be interesting to see what their witness says at the trial May 23.  I’m looking forward to it.
(I should say their lawyer may right about one thing–the bankruptcy court has jurisdiction if this foreclosure fee is really a foreclosure fee.  Because the bankruptcy stopped the foreclosure and caught the mortgage up.  But suppose they say, “Oh that has nothing to do with the foreclosure back in 2009.  This is our New Year’s Special no-reason-at-all-fee.  We just call it a foreclosure fee.”
If it is a no-reason-at-all fee, then maybe the bankruptcy court does not have jurisdiction.  But it will sure be fun to hear them explain their no-reason-at-all fee to the judge.
And I’ll order a transcript. )
 
 
 
 
 
 
 
 

Chapter 13 bankruptcy is a repayment plan approved by the court.  This can be a suitable option for debtors who want an affordable payment plan for their debt obligations based on what they earn. Yet, consumers may be under the impression that only earned wages or a form of employment is the only income that [...]

He knew he wasn’t going to be able to wipe out his student loans in bankruptcy, so he had a better idea. Or did he?
Most people with student loan debt know they can’t wipe out their student loan debts in bankruptcy without jumping through hoops like a circus animal.
They also know that credit card debt can be wiped out in Chapter 7 bankruptcy, or effectively settled in a Chapter 13 reorganization bankruptcy.
Some folks get into their heads that they should pay off their student loans with a credit card, wait awhile, then file for bankruptcy.
That’s where things get tricky.
Educational Benefits, Not Student Loans
Under the U.S. Bankruptcy Code, you can’t discharge a debt for either of the following without a showing of undue hardship:

• an educational benefit overpayment or loan made, insured, or guaranteed by a governmental unit, or made under any program funded in whole or in part by a governmental unit or nonprofit institution;
• an obligation to repay funds received as an educational benefit, scholarship, or stipend; or
• any other educational loan that is a qualified education loan, as defined in section 221(d)(1) of the Internal Revenue Code of 1986, incurred by a debtor who is an individual.

Notice that we’re not talking about student loans; rather, the exception to discharge is for educational benefits OR student loans. True, most educational benefit loans and overpayments are the same as student loans – but not all of them.
To uncover the true definition of what’s excepted from discharge, we need to look to the Internal Revenue Code, which says:

The term “qualified education loan” means any indebtedness incurred by the taxpayer solely to pay qualified higher education expenses—
(A) which are incurred on behalf of the taxpayer, the taxpayer’s spouse, or any dependent of the taxpayer as of the time the indebtedness was incurred,
(B) which are paid or incurred within a reasonable period of time before or after the indebtedness is incurred, and
(C) which are attributable to education furnished during a period during which the recipient was an eligible student.

Such term includes indebtedness used to refinance indebtedness which qualifies as a qualified education loan. The term “qualified education loan” shall not include any indebtedness owed to a person who is related (within the meaning of section 267 (b) or 707 (b)(1)) to the taxpayer or to any person by reason of a loan under any qualified employer plan (as defined in section 72 (p)(4)) or under any contract referred to in section 72 (p)(5).
So there you have it – the term is defined as any indebtedness, not merely a loan termed as a student loan.
Credit Card Debt As Educational Benefit Loan
If you look at the Internal Revenue Code, you’ll note that the qualified education loan incorporates any refinancing of a student loan. When you pay off a student loan with a credit card, you’re refinancing the student loan – trading debt for debt.
Given that, there’s a good argument to be made that when you pay your student loans with a credit card you’re just changing the platform rather than the character of the debt. In other words, what was nondischargeable remains so.
More Hurdles
Under the U.S. Bankruptcy Code, some charges made in the run-up to filing for bankruptcy can be considered to have been incurred without the intent or ability to repay. Those charges may not be discharged in your bankruptcy case, either.
If you figured you’d get smart and pay off your student loans with credit card cards, that may be an additional consideration.
What Are The Odds?
Personally, I’ve never seen a credit card company go through the old records and make this sort of argument. Perhaps it’s happened but not to my knowledge.
Chances are good that if you make a payment or two on your student loans using a credit card, you’re not going to land in hot water so long as you make those credit card payments for long enough. You want to put some distance between the payment and your bankruptcy filing, but even if there’s a problem with wiping out those payments it’s not likely to be a large debt to contend with later on.
As for paying off the entire student loan on a credit card, I don’t think I’d recommend it.
Which Leads Us To The Downside
If you repay your student loan with your credit card, there’s a chance that the creditor will ask the court for that debt to follow you after bankruptcy.
If the credit card carries a lower interest rate than the original student loan, that may not be a terrible outcome. But if the credit card charges more interest than the student loan, you may be putting yourself in a far worse situation by refinancing the loan.
Think of it as a game of chess, requiring you to figure out your options before it’s too late. You’ve got options now, but it’s tough to make right a wrong move.
Photo by Miss Turner
Should You Pay Off Student Loans With Credit Cards? was originally published on Consumer Help Central. If you're seeing this message on another site, it has been stolen and is being used without permission. That's illegal, a violation of copyright, and just plain awful.

Chapter 13 bankruptcy trustees in California and elsewhere frequently object to debtors’ Chapter 13 plans in which the debtor proposes to pay very little to his general unsecured creditors (like credit card companies), while nevertheless continuing to make payments on secured debts for so-called “luxury items.” Such plans, some Chapter 13 trustees have claimed, were made in “bad faith” because payments on the secured debts for such luxury items take away money that could have been used to pay more toward unsecured debts. I have had many San Jose bankruptcy cases in which I worried that the trustee might object to the debtor’s driving a luxury car, even where that car might arguably be necessary to the debtor’s business as a real estate broker, for example.
Now, however, California Chapter 13 bankruptcy debtors no longer have to worry that a trustee can prevent a Chapter 13 plan from being confirmed simply because the debtor wants to continue making payments on her luxury car, or her RV, boat, or second home for that matter. I was recently asked to brief the case Drummond v. Welsh (In re Welsh), 465 B.R. 843 (B.A.P. 9th Cir. 2012), before the San Jose Chapter 13 Bankruptcy Committee. The case involved a Montana couple who had filed Chapter 13 bankruptcy wherein they proposed to continue making payments on three vehicles, an RV, and two ATVs in addition to their home mortgage. The trustee had objected that making these payments on these secured debts left very little to pay toward the debtors’ sizable unsecured debt. Those creditors would receive only pennies on the dollar through the life of the Chapter 13 plan.
The court held that when Congress enacted BAPCPA in 2005, and specifically by enacting the Means Test in bankruptcy, Congress took away bankruptcy judges’ discretion to determine how much of a Chapter 13 debtors’ current monthly income is available to pay toward unsecured debts. Instead, Congress put in place a rigid, formulaic determination of a debtor’s “Current Monthly Income,” allowable withholdings from that CMI, and remaining “Disposable Monthly Income.” In other words, these amounts are determined by formula, not by judicial discretion. The Bankruptcy Code rigidly defines Current Monthly Income in a certain way. For example, it expressly excludes any social security income. Therefore, a Chapter 13 debtor is not required to put any social security income into a Chapter 13 plan. Similarly, all secured debt payments are, by definition, allowed withholdings when determining a debtor’s disposable monthly income available for the Chapter 13 plan. This means that the bankruptcy court no longer gets to decide whether it is fair to unsecured creditors that a Chapter 13 debtor will keep making payments toward a “luxury” car or other secured property, even if doing so limits the amount the unsecured creditors will receive from the Chapter 13 plan.
This means that now, if you file a Chapter 13 bankruptcy in San Jose or elsewhere in California, and you want to keep your luxury car, boat, or RV, the bankruptcy trustee won’t be able to object to your plan solely because you propose to keep these items. As long as you can afford to continue making the payments on these secured debts, and provided that your overall Chapter 13 plan is feasible and meets the liquidation test, for example, then just because you propose to keep making payments on such a luxury item your Chapter 13 plan can’t be attacked as being proposed in bad faith, even if your general unsecured creditors get much less than they would otherwise have received.
Our San Jose bankruptcy attorneys always offer a free initial consultation to Bay Area residents interested in filing Chapter 13 or Chapter 7 bankruptcy. Call us to schedule your free consultation at our San Jose offices.